In the case of Arconic (NYSE:ARNC), the aluminum parts manufacturer, one result is shares hitting a 30-year low.
In this episode of the MarketFoolery podcast, host Chris Hill is joined by Motley Fool contributor Taylor Muckerman to analyze the prospects for a rebound and share why investors are right to be unsettled. Plus, they discuss restaurants that are bucking the current trend of lowering guidance and share an investor's guide to this morning's Academy Awards nominations.
A full transcript follows the video.
This video was recorded on Jan. 22, 2019.
Chris Hill: It's Tuesday, January 22nd. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today from Motley Fool Canada, Mr. Taylor Muckerman. Thanks for being here!
Taylor Muckerman: Yeah, great to see you, man!
Hill: We've got a couple of things to get to, including the ripple effects of the Academy Award nominations, which came out this morning. We have to start, though, with the stock of the day. This is a reminder that you don't have to be going up to be the stock of the day.
Muckerman: [laughs] You do not. Most likely, you're not going up in this market.
Hill: In this case, it's Arconic, which is the maker of aluminum parts that was spun out of Alcoa (NYSE:AA). Shares of Arconic, now they're down about 16%. Earlier, they were down about 25% because the board of directors said that the company is no longer for sale. And it had been for sale. And Apollo (NYSE:APO) had ponied up somewhere north of $10 billion to buy them. The fact that the board has pulled the plug on this has a bunch of investors saying, "No, we're out."
Muckerman: It's a pretty wild story. This company was, like you mentioned, spun out of Alcoa. It was the darling of the deal when they split the aluminum producer and then the parts producer, which is Arconic, out, because it has exposure to aerospace, commercial transport, the oil and gas market. So investors were really excited about this company. And then, in 2017, their cladding business provided aluminum parts for a building in England that caught fire, and they didn't perform as well as they should have. So that's been an overhang for this business since 2017. As early as August of last year, Reuters came out with a story saying that they're going to put the cladding business up for sale, potentially the whole business. And that's what ended up happening. Even as late as earlier this month, this company was definitely for sale. They were going to go for $22 for Apollo Global. Now, this morning, the management team and the board came out and said that they don't believe that they've received any offers that justify the value of this company for shareholders. And so now, [laughs] shareholders are really feeling the pinch, with shares down as much as 25% or more in trading today.
Hill: The stock is just under $17 a share. By my calculations, this puts it at a 30-year low.
Muckerman: [laughs] Yeah.
Hill: [laughs] So, I mean ...
Muckerman: (unclear 2:27)
Hill: I kind of am. On the one hand, I think, "Wait a minute, someone's going to pay for this business." I'm wondering if the 30-year low seems like a buying opportunity or if anyone who's looking at this should wait until, I don't know, some more information comes out of the board of directors. I will say that it's pretty unsettling to see a reversal like this. I'm not a shareholder, but anytime you have -- and maybe that's part of the reaction that we're seeing with the stock today. There wasn't really any indication that anything other than a sale was going to happen. And for them to just completely pull the plug and not even say, "We think it's worth more than that," or, "We're saying no to this offer, but we're still open to negotiation," it's like, "No. We're not for sale." That's really throwing people for a loop.
Muckerman: Yeah, it voices a lot of distrust from investors for management because they had multiple offers. Up until they announced and said no, this was all going through. I definitely think the sell-off may be a little bit overdone. Investors are maybe just like, "You know what? We're out, because now we have no clue what management is thinking," and rightfully so. If you have exposure to oil and gas market right now, not the best place to be. Aerospace is still a booming business, but not necessarily growing gangbusters. So it seemed like this might have been a great deal for the investors, and now they're just like, who knows what's going to happen? This won't be the last investors hear about Arconic and a potential sale moving forward. So if I was considering, I would definitely still pump the brakes a little bit before jumping in and wait to see what else comes out of this before buying shares.
Hill: Let's move onto the restaurant industry. You and I were talking this morning. Look, we're very early into earnings season, and yet we're already seeing somewhere in the neighborhood of 50%, maybe even slightly more than that, of companies coming out reporting missing on the top line. As you pointed out when we were chatting this morning, you have a bunch of restaurant companies that are ratcheting back their guidance. That's probably for the better. I think as a general rule of thumb, you and I are both fans of under promise, over deliver.
Hill: We'd rather see companies be a little bit more conservative with their guidance. And yet, across the industry, we see all of these companies pulling back their guns. But as you pointed out, we've also got some pretty well-known names that -- not only are they not really ratcheting back the guidance, they're almost immune to what's happening in the rest of the industry.
Muckerman: Yeah, you mentioned the guidance being lowered in some big names. Apple, obviously, one of the biggest that we've heard. Samsung, Delta, Macy's, Kohl's, American Airlines, Constellation Brands, Ford, Stanley Black & Decker today down about 15% after lowering guidance.
Hill: Yeah, I should say, it's not just the restaurant industry where the guidance, it's being ratcheted back.
Muckerman: Yeah, it's all over the place. And yet you see fast-casual and big-restaurant brands, and some with access to delivery -- you see Chipotle, Starbucks, Domino's, McDonald's -- these companies grew their share price last year and it looks like they're continuing to be aggressive moving forward. Domino's talking about doubling their revenue from the 2017 levels by 2025, adding 2,000 more stores. Granted, I think they're benefiting a little bit from Papa John's struggles. But I don't think that's entirely why they're doing so well right now. To pull up 50% in the market last year vs. the overall market selling off considerably to end the year, with the new CEO and his marketing background and that heightened focus there. As a whole, when you look at Chipotle and its peers in fast casual, up 17% last year. One of the lone bright spots of the market. And I think moving forward, the American eater is continuing to eat. Grubhub delivery service, that stock's doing pretty well. When you contrast that with Blue Apron, obviously a total source of investor wealth destruction. That's the home eater cooking at home vs. having food delivered to them already pre-made. I think that we're moving more and more in that direction, of people just wanting that food ready for them when they want it.
Hill: I'm glad you mentioned Grubhub. It really does seem like we're at a point now where, if you own a restaurant stock or you're thinking about buying a restaurant stock, one of the questions you absolutely need to ask as an investor is, what is this company's strategy when it comes to delivery? They need to have one. And it's not to say it's the same answer for everyone. But in some cases, it does make sense to partner with a Grubhub and outsource that. Others are trying to do it on their own. Again, it's not that one size fits all. But if they don't have an answer to that, that goes on the negative side.
Muckerman: Yeah, absolutely. You don't need Grubhub, but you do need delivery, or at least some kind of mobile order-ahead option where you can pick up. You look at companies like Brinker International -- it owns Chili's. They performed very well last year. Applebee's owner, Dine Equity, up 33% last year. Both of these companies offering that call-ahead or text-ahead or order-ahead on your phone, come in, pick it up, and take it right back to your house if you want to. So you're not necessarily forced to eat at the restaurant or wait for that food to be prepared in your seat and then tip. I think those options are critical when you look at these restaurant stocks.
I think, maybe, down the line, if restaurants don't prepare themselves properly -- you still have people coming in to eat, and then you get these people ordering, which opens your market up to a lot more people. Yeah, that's great, but if your kitchen and staff aren't prepared, food quality could suffer. So you need to definitely be prepared for that on the staffing side. Definitely keep your standards high, even though you're going to have this crazy influx of potential customers that aren't visiting and staying at your location.
Hill: You're also seeing it show up more in marketing and advertising. A couple of the restaurant chains you just mentioned, their television ads are promoting the delivery aspect and the pickup aspect.
Muckerman: Domino's calls it their fortressing strategy. They're taking a page out of Starbucks' playbook. These 2,000 stores aren't going to all be in new locations. They're looking to add condensed locations, where you have closer pick-up times or shorter delivery times. You're not going to see one city with one store -- you're going to see a city with multiple stores in close proximity so that everyone there can get their pizza in just a few minutes picking it up or having it delivered.
Hill: One bit of restaurant news today that is timely, doesn't really tie in so much with this discussion because it's not a publicly traded company, but Chick-fil-A did announce that, despite the fact that Atlanta is home to the Super Bowl and there's a Chick-fil-A location in the stadium, in keeping with their long-standing practice, they will not be open. So anyone going to the Super Bowl who's hoping to get a little Chick-fil-A, sorry, they're not going to be open. They're not open on Sundays.
Muckerman: Good for them!
Hill: Yeah, good for them.
Muckerman: Stand your ground.
Hill: Absolutely! As I mentioned, the Academy Award nominations came out this morning. As fans of movies, we look at this news through the lens of movies that we saw and enjoyed and maybe we're rooting for. As investors, we look at this news through the lens of investing. It shakes out with Disney (NYSE:DIS), as a studio, getting 16 nominations, Netflix (NASDAQ:NFLX) getting 13 nominations, including its first-ever nomination for Best Picture with Roma. Amazon Studios coming in with three. One more bit of good news for Disney and Netflix shareholders.
Muckerman: Yeah, absolutely. It seems like a one-two punch with these two companies. When you look at Disney's content spending, when you remove sports, Netflix is almost right there with them. It didn't take long for that company to catch up. As you mentioned, Amazon getting a few bids. They're nipping right on the heels of Netflix with that content spending. Ramping it up, and not spending just willy-nilly. Apparently, they're making wise decisions on the directors, the cast, the themes of these movies and shows. Very well done for these companies. If you're a shareholder, that's absolutely what you want to see. Without shows and movies for the subscribers to want to watch, what's the business really worth?
Hill: There absolutely is economic upside. We've seen the data year after year that films that get these nominations and win the Academy Awards end up getting a boost at the box office. I should point out that Disney was 16 nominations, Netflix with 13. Netflix actually came in third. Fox Searchlight, as a studio, came in second, with 15. You look at Disney's acquisition of Fox, Fox Searchlight, 15 nominations. Twentieth Century Fox with five. Really, the Disney properties coming in with, what, 36? Hopefully -- I say this as a fan of movies and as a Disney shareholder -- they're just going to let the Fox Searchlight people keep doing what they're doing, and maybe not meddle too much. That's a studio that has performed very well in terms of awards season.
Muckerman: One thing I saw that interested me a little bit was the projected additions of Hulu subscribers in 2018 are supposed to trump Netflix for the first time ever. Obviously, Disney now owns a sizable stake of Hulu. You can imagine those movies being rolled down maybe strictly to Hulu subscribers. A nice little bump there for the subscription business on top of Disney Plus, which will be coming out soon.
Hill: It's going to be interesting to see what Disney does with Hulu and if three years from now, we see some sort of merging of the Disney streaming app and Hulu, or if they're able to manage them separately and make them both grow.
Muckerman: Definitely curious about that myself. I have no predictions, but it'll be interesting to see.
Hill: Taylor Muckerman, thanks for being here!
Muckerman: Appreciate it!
Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon, Starbucks, and Walt Disney. Taylor Muckerman owns shares of Amazon, Chipotle Mexican Grill, and Starbucks. The Motley Fool owns shares of and recommends Amazon, Apple, Chipotle Mexican Grill, Netflix, Starbucks, and Walt Disney. The Motley Fool owns shares of Delta Air Lines and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Constellation Brands and Ford. The Motley Fool has a disclosure policy.